Acquisition fuels K-12 market speculation

The education technology market has been heating up, spurred recently by the announcement that Renaissance Learning Inc., a K-12 assessment- and learning-analytics company, will be acquired by a private-equity company for $1.1 billion, making the deal one of the largest acquisitions ever in the ed-tech arena.

The planned sale was announced earlier this month by the Wisconsin Rapids, Wis.-based Renaissance Learning, revealing that it will be purchased by Hellman & Friedman LLC, a private-equity firm with offices in San Francisco, New York, and London. The seller is European-based Permira, also a private-equity firm, which had purchased Renaissance Learning almost 2½ years ago for $455 million.

Last month, Google Capital made a $40 million investment—its first funding of an education company—in Renaissance Learning, which is known in K-12 circles for its star assessments and its Accelerated Reader and Accelerated Math curricula. At the time, Google Capital had valued Renaissance at $1 billion.

"What's made Renaissance Learning successful is the efficacy of their products, which drive really good outcomes in reading and math for young kids," said Allison Bailey, a senior partner and managing director of the Boston Consulting Group, a global management-consulting firm based in Boston that advises major publishers on business strategy.The size of the sale—which is notably Hellman & Friedman's first foray into the K-12 market—puts it in the stratosphere of education mergers and acquisitions.

"Hellman & Friedman stand apart," said Jack Lynch, the CEO of Renaissance Learning, in a phone interview before the announcement of the deal. "They focus on companies with demonstrable growth."

Mr. Lynch added: "Our learning progression, the sequencing of skills students must master from kindergarten to 12th grade, is a unique, uncommon asset in K-12, propelling our growth forward. That was the catalyst for their interest in our company."

The learning progression, he pointed out, relies on data from more than 45 million assessments taken each year by students at 40,000 public and private schools, or more than one-third of all K-12 schools in the United States.

Company pricing decisions and plans for 2014 will not be affected by the change in ownership, the company said.

High Valuation Attracts Attention

The fact that Renaissance Learning has commanded such a high price is being viewed as a positive by at least one of the businesses that share the ed-tech landscape. "Overall, I think it's good to see companies that are being successful in the industry receiving favorable valuations from investors," said Stephen W. Gardner, the senior vice president of sales and marketing for the Oakland, Calif.-based Scientific Learning Inc., which sells Fast ForWord, a neuroscience-based online reading intervention, and Reading Assistant, a fluency-development program that uses speech-recognition technology.

Mr. Gardner, whose company's products are currently used by 4,000 K-12 schools, said Scientific Learning is "peripherally competitive" with Renaissance Learning, in that they compete for districts' money. He praised the news of the acquisition, saying, "It raises the profile and visibility for the education technology space, in general."

Even though this is the first move into K-12 education for Hellman & Friedman, the firm does have experience in higher education via its ownership of Ellucian Co. LP, a software company that serves colleges. The firm also owns the Nielsen Co., a high-profile global-information and -analytics company. Such a large transaction, experts pointed out, is bound to draw attention to K-12 education technology as fertile ground for investors.

"The talk [among ed-tech owners] will be that 'we should get big valuations for our company, too,' " said Chad Johnson, a managing director of Cherry Tree & Associates, a Minnetonka, Minn.-based investment-banking firm.

But the reality, Mr. Johnson said, is that a private-equity firm like Hellman & Friedman is focused on Renaissance's strong financials. "They don't buy companies that are not profitable and growing," he said.

Business Models Evolving

Experts said the backdrop for this transaction is a hot market of investors chasing opportunities, with more private-equity funds seeking to make investments and more capital available to them.

At Hellman & Friedman, state pension funds, university endowments, and foundations are among the limited-partner investors, according to the firm's website.

"The amount of money available for deals is increasing faster than the number of deals available," said Baran S. Rosen, the president of Whitestone Communications Inc., a mergers and acquisitions adviser based in New York City.

This high-profile acquisition demonstrates to the private-equity world that changes in the K-12 education market are being driven largely by technological advances, much like what has happened in health care and financial services.

Market analysts pointed out that as traditional print-based curricula move online into a potentially high-renewal, subscription-based delivery system, the value of companies that can offer those digital services is likely to rise.

"The business model has changed; therefore, the value has become greater," said Mr. Rosen.

Even so, Ms. Bailey of the Boston Consulting Group finds the current valuations of ed-tech companies to be so high that "it's a little bit scary."

Mr. Lynch of Renaissance Learning said Hellman & Friedman is investing not just in the company, but in the management team, adding that he plans to make a financial investment of his own in the business now. The acquisition will give Renaissance what it needs to continue building out its capabilities, further expand its market reach, and help teachers transform education, he said.

In a statement about the sale, Anupam Mishra, a managing director at Hellman & Friedman, said: "Renaissance's history of innovating to help teachers is long and unrivaled. Renaissance is at the forefront of personalized learning and will have a meaningful impact on education in the 21st century. We are proud to be a part of it."

Coverage of entrepreneurship and innovation in education and school design is supported in part by a grant from the Carnegie Corporation of New York. Education Week retains sole editorial control over the content of this coverage.

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